The ability to claim rental expenses when renting a house to your son and daughter-in-law depends on several factors, primarily whether the rental arrangement is considered to be at fair rental value and whether the activity is engaged in for profit.
- Fair Rental Value: According to § 280A(d)(3), a taxpayer shall not be treated as using a dwelling unit for personal purposes if the dwelling unit is rented at a fair rental value to any person for use as their principal residence. Therefore, if you rent the house to your son and daughter-in-law at a fair rental value, the rental activity is not considered personal use, and you can claim rental expenses.
- Profit Motive: The rental activity must be engaged in for profit. Rev. Rul. 75-14 and Rev. Rul. 76-287 clarify that if the rental is not engaged in for profit, the deductions are limited. Specifically, if the rental is not for profit, you can only deduct expenses to the extent of the rental income, and certain expenses like depreciation are further limited.
- Deductible Expenses: If the rental is at fair rental value and for profit, you can deduct ordinary and necessary expenses related to the rental activity. These include:
- Interest and Taxes: Deductible in full as they are allowable under sections 163 and 164 of the Code.
- Operating Expenses: Deductible to the extent that the gross income from the rental exceeds the interest and taxes.
- Depreciation: Deductible to the extent that the gross income from the rental exceeds the interest, taxes, and operating expenses.
- Limitations on Deductions: If the rental is not at fair rental value or not engaged in for profit, the deductions are limited under section 183. You can only deduct expenses up to the amount of rental income, and any excess expenses cannot be carried forward to the next year.
In summary, you can claim rental expenses if you rent the house to your son and daughter-in-law at a fair rental value and the rental activity is engaged in for profit. If these conditions are met, you can deduct ordinary and necessary expenses related to the rental activity. If the rental is not at fair rental value or not for profit, your deductions will be limited to the amount of rental income.
Sources:
Rev. Rul. 76-287
Publication 527 (2023)
Rev. Rul. 75-14
§ 280A. Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc.
Rev. Rul. 80-55
Publication 535 (2022)
